KUALA LUMPUR, March 26 (Reuters) - Malaysia's former prime minister Mahathir Mohamad has called off a planned visit to the annual meeting of the party he led to five election victories after his son was defeated in polls for a key post.

Mukhriz Mahathir was defeated late on Wednesday in a vote to lead the youth section of the United Malays National
Organisation (UMNO) by the son-in-law of incumbent premier Adbullah Ahmad Badawi, whose term Mahathir's sniping helped end early.

UMNO will get a new leader on Thursday to replace Abdullah and the make-up of the team of Najib Razak, who will become prime minister in early April, is being watched closely by investors who want to see whether he can deliver on promises to reform the economy in this Southeast Asian country of 27 million people.

The election of the 33-year old Oxford-educated Khairy to the youth post that has provided three of Malaysia's six prime ministers (including Najib) was a major surprise.

"Khairy Jamaluddin might set a positive tone for the party and the stock market because he could help to implement reforms in the party," said a trader in Kuala Lumpur at a bank whose policy forbids names to be used.

Mahathir, who ruled Malaysia for 22 years until 2003, resigned his membership of UMNO in 2008 in protest at his
successor's policies and poor election results for the National Front coalition of which the party is the lynchpin.

He is still influential in Malaysian politics, but and had vowed not to return until Abdullah was ousted. He had been due to make an appearance on Thursday.

A spokesman for Mahathir said that he would not come but did not say why.

Forced out

Abdullah presided over the worst ever results in national and state elections for the National Front coalition that has
ruled Malaysia for 51 years and was forced out early to make way for Najib, who is currently deputy prime minister.

Najib will take office at a time when Malaysia's trade dependent economy is set for its worst recession since the 1998 Asian financial crisis.

In a recent interview with Reuters, Mahathir said that Najib's performance as deputy premier had been too timid.

"Najib can do well, but we will have to see, because when I asked Abdullah to appoint him as deputy I had a lot of hope for him, but he did not perform the way I expected," Mahathir said.

Key posts being decided on Thursday include the deputy president of UMNO, and defeat for Najib's favoured candidate, International Trade Minister Muhyiddin Yassin, is seen by political analysts as a bellweather of Najib's support.

If Mahathir-era stalwarts such as Foreign Minister Rais Yatim are elected to top posts, that could weaken the ability
of Najib to undertake reforms.

"Who the delegates choose will tell whether UMNO leaders and the party's grassroots are on the same wavelength in
calling for urgent reforms," the government-supporting New Straits Times said in an editorial on Thursday.